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Utilizing a natural experiment setting of the 2003 Dividend Tax Cut, this study documents that as the tax rate on dividends drops, corporate payout policy is contingent on firm's growth opportunity, shareholder rights, and their interactions. The study confirms that firms with high shareholder rights act in the interest of the shareholders. It also provides evidence that the 2003 Dividend Tax Cut helps move the cash flow out of the firms with low growth., INTRODUCTION The Job and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) has significantly dropped the tax rate on dividends. Instead of taxing dividends as ordinary income with the highest [...]

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-5890.2010.00113.x Byline: Ludger Linnemann ([dagger]) Keywords: tax policy; unemployment; labour market frictions; Laffer curve; government spending; growth Abstract: Abstract The paper studies the effects of income tax rate changes in a general equilibrium model with frictional unemployment. Laffer curve effects, by which a tax rate reduction may increase the level of government spending or its share in output, are shown to be possible under certain conditions. These are the presence of unemployment benefit payments, government budget balance through fiscal spending adjustment and limited quantitative importance of labour reallocation costs. Endogenous government spending acts as a fiscal accelerator if the fiscal burden of unemployment benefit payments is large, but reduces the employment effects of tax rate cuts if it is low. Author Affiliation: ([dagger])Technical University of Dortmund (ludger.linnemann@tu-dortmund.de)

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-5890.2009.00095.x Byline: Vito Polito ([dagger]) Keywords: capital theory; corporate taxation; investment incentives; dividend policy constraints Abstract: Abstract This paper argues that forward-looking indices of the effective tax burden on income from capital - namely, effective marginal and average tax rates - are negatively biased because traditional models overlook dividend constraints associated with financial tax incentives, such as accelerated depreciation. The paper presents measures of the two indices adjusted to remove the bias and compares the new indices with the traditional ones. Numerical simulations carried out to quantify the magnitude of the bias for France, Germany, Ireland, Italy and the UK give evidence of sizeable distortions in the unadjusted indices and, in turn, suggest significant mismeasurement in the current assessment of the effective tax burden. Author Affiliation: ([dagger])Cardiff Business School (Politov@cardiff.ac.uk)

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2008.08.012 Byline: Dean Corbae (a), Pablo D'Erasmo (b), Burhanettin Kuruscu (a) Abstract: This paper uses a dynamic political economy model to evaluate whether the observed rise in wage inequality and decrease in median to mean wages can explain some portion of the relative increase in transfers to low earnings quintiles and relative increase in effective tax rates for high earnings quintiles in the U.S. over the past several decades. Specifically, we assume that households have uninsurable idiosyncratic labor efficiency shocks and consider policy choices by a median voter which are required to be consistent with a sequential equilibrium. We choose the transition matrix to match observed mobility in wages between 1978 and 1979 in the panel study of income dynamics (PSID) data set and then evaluate the response of social insurance policies to a new transition matrix that matches the observed mobility in wages between 1995 and 1996 and is consistent with the rise in wage inequality and the decrease in median to mean wages between 1979 and 1996. We deal with the problem that policy outcomes affect the evolution of the wealth distribution (and hence prices) by approximating the distribution by a small set of moments. We contrast these numbers with those from a sequential utilitarian mechanism, as well as mechanisms with commitment. Author Affiliation: (a) The University of Texas at Austin, USA (b) University of Maryland, College Park Article History: Received 9 May 2008; Revised 20 August 2008; Accepted 20 August 2008 Article Note: (footnote) [star] We thank Daphne Chen for outstanding research assistance. We also thank Borghan Narajabad, Fabrizio Perri, and especially Vincenzo Quadrini for suggestions that substantially improved the paper. Finally, we thank seminar participants at Carlos III, Georgetown, Rice, USC, Virginia, Western Ontario, Federal Reserve Banks of Dallas and Richmond, 2007 SED Meetings, the 2007 Econometric Society Meetings, and the Carnegie-Rochester Conference.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2008.02.002 Byline: John Hassler (a)(c), Per Krusell (b)(a)(c)(d), Kjetil Storesletten (e), Fabrizio Zilibotti (f)(c) Abstract: For many kinds of capital, depreciation rates change systematically with the age of the capital. Consider an example that captures essential aspects of human capital, both regarding its accumulation and its depreciation: a worker obtains knowledge in period 0, then uses this knowledge in production in periods 1 and 2, and thereafter retires. Here, depreciation accelerates: it occurs at a 100% rate after period 2, and at a lower (perhaps zero) rate before that. The present paper analyzes the implications of non-constant depreciation rates for the optimal timing of taxes on capital income. The main finding is that under natural assumptions, the path of tax rates over time must be oscillatory. Oscillatory tax rates are optimal when depreciation rates accelerate with the age of the capital (as in the above example), and provided that the government can commit to the path of future tax rates but cannot apply different tax rates in a given year to different vintages of capital. Author Affiliation: (a) Institute of International Economic Studies, Stockholm University, 10691 Stockholm, Sweden (b) Princeton University, USA (c) CEPR, UK (d) CAERP, Spain (e) University of Oslo, Norway (f) IEW University of Zurich, Switzerland Article History: Received 1 November 2006; Revised 7 February 2008; Accepted 13 February 2008 Article Note: (footnote) [star] We would like to thank Robert King, one anonymous referee, Katharina Greulich, Heng Chen, and participants to many seminars and conferences for comments. Storesletten -- a fellow of CEPR -- thanks the Norwegian Research Council for financial support.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.07.023 Byline: Kent P. Kimbrough Keywords: Revenue maximizing inflation; Inflation tax; Seigniorage; Cagan money demand function; Cagan's rule Abstract: A classic monetary policy result is that revenue maximization entails setting the inflation tax rate equal to the inverse of the interest semi-elasticity of the demand for money. The standard approach underlying 'Cagan's rule' is partial equilibrium in nature, treating money demand as being given from outside the model and abstracting from the real effects of inflation. This paper reconsiders the question of the revenue maximizing inflation rate in a general equilibrium framework with a labor-leisure choice, where money is held because it reduces transactions costs. In this framework, the revenue maximizing inflation tax rate is lower than that implied by Cagan's rule. Author Affiliation: Department of Economics, Duke University, Box 90097, Durham, NC 27708, USA Article History: Received 6 May 2005; Revised 20 July 2005; Accepted 21 July 2005 Article Note: (footnote) [star] I would like to thank the editors and the referee for their comments, which significantly improved the paper.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.03.016 Byline: Juan Carlos Conesa (a), Dirk Krueger (b)(c) Abstract: This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible. Author Affiliation: (a) Universitat AutA[sup.2]noma de Barcelona, Spain (b) Department of Business and Economics, Johann Wolfgang Goethe-University Frankfurt am Main, Mertonstr. 17, PF 81, 60054 Frankfurt am Main, Germany (c) University of Pennsylvania, CEPR and NBER, USA Article History: Received 24 March 2005; Accepted 29 March 2005 Article Note: (footnote) [star] This work has benefitted from useful comments by the editor Charles Plosser, an anonymous referee, Marco Bassetto, Martin Floden, Jonathan Heathcote, Tim Kehoe, Victor Rios-Rull and Tom Sargent, as well as seminar participants at CEMFI, CERGE-EI, Complutense, EUI, IDEI, UPF, UPN, UPO, UPV, the Hoover Institution and the 2001 SED Meetings in Stockholm. Conesa acknowledges financial support from Ministerio de Educacion y Ciencia (SEC2003-06080), Generalitat de Catalunya, CREA and Fundacion Ramon Areces, and Krueger acknowledges financial support under NSF Grant SES-0004376. All remaining errors are our own.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.02.009 Byline: Tatyana A. Koreshkova (a)(b)(c) Abstract: Inflation rates are more dispersed and are persistently higher in developing countries. This paper quantifies the importance of the public-finance motive for inflation in the presence of a tax-evading sector, the underground economy. The approach is motivated by the observation that the underground economy is especially large in poor countries. The analysis builds on a general equilibrium monetary model with two production sectors, where income in one of the sectors cannot be taxed. A benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate. The model is first calibrated to the U.S. economy and is then used for a cross-country simulation. The resulting relationships between the size of an underground economy, inflation rate, income tax rate and the share of seigniorage in the government revenue rationalize the cross-country data quantitatively well. Author Affiliation: (a) Department of Economics, Concordia University, 1455 de Maisonneuve Blvd. W., Montreal, Quebec, Canada H3G 1M8 (b) Institute for Policy Analysis, University of Toronto, 140 St. George St., Toronto, Ontario, Canada M5S 3G6 (c) Department of Economics, Oberlin College, Oberlin, OH 44074, USA Article History: Received 17 February 2005; Accepted 25 February 2005 Article Note: (footnote) [star] Earlier versions of the paper circulated under the titles 'Why inflation is high in poor countries' and 'Accounting for inflation rates in developing countries.' I thank Andres Erosa, Gustavo Ventura and Jim Davies for their invaluable guidance, and David Andolfatto, Bruce Champ, Paul Gomme, B. B. Ravikumar, Steven Williamson, an anonymous referee and seminar participants at the University of Western Ontario, University of Southampton, Instituto Tecnologico Autonomo de Mexico and Oberlin College for their helpful comments. All remaining errors are mine.

Byline: Thomas Dickescheid (1) Keywords: international taxation; double taxation relief; tax competition; tax export Abstract: This paper examines the choice of international double taxation relief methods by two small countries that mutually exchange foreign direct investment. At the first stage, each country chooses between the exemption and the credit method (as prescribed by the OECD model treaty) and at the second stage, each country sets nationally optimal non-discriminatory capital tax rates. It is shown that in the subgame perfect equilibrium both countries choose the exemption method. Mutual application of the exemption method is also shown to yield the highest welfare for each country. While the tax export effect generally induces both countries to choose inefficiently high tax rates, this effect is weakest when both countries exempt foreign earned profits from domestic taxation. Author Affiliation: (1) Department of Economics, University of Dortmund, 44221, Dortmund, Germany Article History: Registration Date: 02/11/2004

ABSTRACT Tax provisions that reduce deductions and credits by imposing floors and phase-outs have become an increasingly popular tool used by Congress. However, these provisions also obscure the marginal tax [...]

Byline: Michael P. Devereux (1), Rachel Griffith (2) Keywords: effective tax rates; discrete investment; location; multinationals Abstract: We consider the impact of taxation when investors face a discrete choice between two or more mutually exclusive projects in particular we consider the location choice of multinationals. Such choices depend on an effective average tax rate. We propose a precise measure of this rate, which is shown to be equal to a weighted average of an effective marginal tax rate and an adjusted statutory tax rate, where the weights depend on the profitability of the investment. Estimates of the distribution of this measure are presented and compared for domestic and international investment in the USA, France, Germany and the UK. We analyse the impact of harmonising corporate tax rates in Europe on incentives to locate in France, Germany and the UK. Author Affiliation: (1) Institute for Fiscal Studies and CEPR, Department of Economics, Warwick University, University of Warwick, Coventry, CV4 7AL, UK (2) Institute for Fiscal Studies, University College London and CEPR, 7 Ridgmount Street, London, WC1E 7AE, UK Article History: Registration Date: 05/10/2004

Byline: Kjetil Bjorvatn (1), Guttorm Schjelderup (2) Keywords: tax competition for capital; international public goods Abstract: A well known result in the tax competition literature is that tax rates are set too low in the Nash equilibrium to finance an efficient level of public consumption goods. In this model we introduce international spillovers in public goods provision and show that such spillovers reduce, and in the limiting case of perfect spillovers, eliminate tax competition. There is, however, always underprovision of the public good in equilibrium, since larger spillovers increase the problem of free riding. In an extension to the model, we demonstrate that congestion costs may result in overprovision of the public good. Author Affiliation: (1) Norwegian School of Economics and Business Administration and LOS, Norway (2) Norwegian School of Economics and Business Administration and CESifo, Norway Article History: Registration Date: 30/09/2004

Byline: Samuel Tung (1), Stella Cho (2) Keywords: tax rates; tax incentives; locational choices; investment incentives zones; foreign direct investment Abstract: This paper examines whether concessionary tax rates and tax incentives can attract foreign direct investment (FDI) into certain designated areas in China. Since China opened its doors to foreign investors in 1979, tax benefits have been used extensively to attract FDI into different areas. In 1991, a new tax law was introduced which superseded two previous income tax laws. This new law provides additional tax benefits which improve the investment environment for foreign investors. This study investigates the effect of China's tax rates and tax incentive policy on FDI and on the locational choices of foreign firms. Our empirical results indicate that tax rates and incentives are important determinants of regional investment decisions in China, after controlling for potential confounding variables covering infrastructure, unemployment rate, wage rate and agglomeration economics. Specifically, areas offering lower tax rates and increased tax incentives are found to attract greater amounts of FDI. The impetus of the tax effect on FDI is more apparent in the post-1991 period due to changes in the tax laws. Our results also suggest that infrastructure variables are important determinants of regional investment decisions. Author Affiliation: (1) Department of Accountancy and Law, The Hong Kong Baptist University, 224 Waterloo Road, Kowloon Tong, Hong Kong (2) Department of Accountancy, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong Article History: Registration Date: 03/10/2004

Abstract: This paper proposes a method for evaluating the impact of tax structure changes on tax revenue. The technique consists of decomposing the gap between actual revenue and potential revenue into components attributable to changes in (i) the tax rate structure (ii) deductions and (iii) tax evasion. Our results indicate that, for the Indian reform episode we examine, there were initial gains which could not be sustained over time. The magnitude of the gains from the reform were limited and failed to significantly curtail losses from tax evasion. Article History: Registration Date: 05/10/2004

A review of works related to estimated average marginal income and Social Security tax rates was undertaken to analyze the average marginal tax rates from 1981 to 1994. A decline ranging from 16% to 12% was noted from the average marginal effective income tax rate since 1981. The 5% to 6.5% increase recorded in the average marginal Social Security tax rate continues to make the combined federal tax burden relatively high.

Data compiled by the UK's non-financial firms that estimates corporate tax burdens or Effective Tax Rates (ETR) from 1968-1993 are analyzed to find out if firm size affects corporate tax burden. Results show that from the period 1968-1979, size effect is evident, particularly in mineral extractive firms. In the proceeding periods, however, size effect diminished leading to a negative association between ETR and effective tax rates in the 1970s and 1980s.

Average individual income tax rates went up to 14.3% of adjusted gross income in 1994, as more taxpayers moved into higher tax brackets. The 1994 average was the highest since 1986, the year before the Revenue Act of 1986 took effect. The average tax per return was $6,104 in 1994, which was $287 more than 1993. Total income tax for the year, including $2.2 bil in alternative minimum tax and after taking off $8.9bil in tax credits, went up 6.4% to $534.8 bil. By contrast, adjusted gross income went up 4.8% to $3,736.6 bil.

THEORETICAL INVESTIGATIONS of the effect of government debt on consumption and private saving have discovered many reasons why Ricardian equivalence may fail to hold.(1) Recently, Barsky, Mankiw, and Zeldes (1986), [...]

Seventy-nine percent of the 113.7 million individual income tax returns for tax year 1990 were taxable, that is, had an income tax liability. Of those that owed taxes, the average liability was $4,976 per return. Among the taxable returns, the average tax rate declined for the third straight year to 13.55%. Changes in the calculation of income resulting from the 1986 Tax Reform Act and subsequent tax legislation are discussed as they affect tax rates and tax shares.

Average tax rates were 13.67% for 1987, 13.81% for 1988 and 13.71% for 1989. These rates, which reflect the broader concept of adjusted gross income (AGI) under the Tax Reform Act of 1986, were recomputed to match the 1979 definition of AGI, and rates were obtained of 13.56% for 1985, 13.59% for 1986, 13.49% for 1987, 13.71% for 1988 and 13.58% for 1989. The rates reflect changes in tax rate structure and treatment of certain items of income and deductions. Data is also included on computation of taxable income, marginal tax rates, income and tax shares, and alternative minimum tax.

The results of a postal survey which investigated the impact of changes in tax rates and allowances on capital expenditure decisions by the UK's largest industrial companies are presented. Managerial perceptions of how the magnitude and timing of fixed investments, which account for a large share of total investment in the UK, would have been affected if the new tax provisions had applied at the time are examined and the reasons for such responses are analyzed. Specific focus is placed on the role of tax in capital budgeting.